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Key developments and notifications- 19th Nov 2023

Nifty 50 and Sensex have risen well for the third consecutive week while the Bankex failed to sustain the break. In US S&P 500 barely gains while Dow ends lower on the back of benign inflation data points.

Let’s review key developments and notifications last week.

1. RBI

1a.RBI Googly on Banks/NBFCs

RBI followed up Governor’s concerns expressed on 6th Nov 2023, with its circular on 16th Nov 2023 increasing risk weight on consumer credit exposures.

  1. Consumer credit exposure of commercial banks and NBFCs, including personal loans shall attract higher risk weight of 125% (revised from 100%)
  2. Housing loans, education loans, vehicle loans, gold loans, microfinance/SHG loans are excluded.
  3. Risk weight of Credit card receivables of banks increased to 150% and of NBFCs to 125%.
  4. Exposures of banks to NBFCs shall attract higher risk weight of 25% over and above the relevant risk weight linked to their accredited credit ratings. – doubled to 45% from 20% for AAAs, to 55% from 30% for AAs, and for A-s to 75% from 50% earlier.

Why now?

  1. Unusual growth of ~23% in unsecured loans higher than credit growth of 12-14%.
  2. From Sept 2021 to Sept 2023, Consumer durable loans have grown by 58%, credit card receivables grown by 64%, and other personal loans (Rs. 12.41 lakh cr.) grew by 57%. Within this, proportion of small ticket personal loans have increased to 8% in June 2023 from 3% in 2019.
  3. Bank lending to NBFCs up by 50% of incremental credit during the last 12 months and NBFCs unsecured loans grew 75% in the last 2 years compared to 45% for the overall system.
  4. As per CIBIL, the percentage of borrowers missing a repayment was 5.4% in Q2’ 2003-24, up 120 bps since Q2 2022-23 in small ticket loans.

 Why it is stringent?

  1. The higher risk weight is applicable not only to incremental but outstanding advances as well.
  2. Top up loans extended against depreciating movable assets like vehicles or consumer durables, also being grouped under unsecured loans, independent of loan to value.

What is the impact?

  1. Capital Adequacy requirement goes up for banks/NBFCs. CET 1 of banks are expected to see a decline of 30-100 basis points due to the increased risk weight.
  2. Loans would be costlier in this segment to price the higher risk weight.
  3. Double whammy for NBFCs – higher risk weight and reduced bank exposure; thus, NBFCs may flood bond market making bond borrowing also pricier for them.
  4. Share prices of NBFCs/Banks having higher unsecured exposure declined on Friday by – SBI Cards- 5.1%; RBL Bank 7.8%, IDFC First 4%

1b.  Why ban on Bajaj Finance?

RBI on Nov 15, 2023, has directed Bajaj Finance Ltd. (“the company”) to stop sanction and disbursal of loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’, with immediate effect.

What prompted RBI?

  • Non-issuance of key fact statements (KFS) to the borrowers under these two lending products, and deficiencies in the KFS for other digital loans of the company.
  • A KFS is a document (mandated under digital lending guidelines) detailing vital information on a loan like amount, tenure, interest rate, fees and penalties which were not provided for the customers of Bajaj Finance.

A Macquarie report out of the 3,580,000 customers added in the second quarter about 670,000 or 19% were EMI card customers. Digitally sourced EMI card franchise stood at 4,200,000 or 10% of the EMI card base.

1c. RBI new regulation on cross border trade payments.

What’s new?

  • As part of this regulation, released last week, all the non-bank entities involved in processing payments for the import and export of goods and services will need to get licensed as Cross Border Payment Aggregators(PA/PG – CB).
  • Under the PA/PG – CB regulations, UPI is now allowed to be used and the maximum limit per transaction has also been increased to ₹25 lakh from around ₹ 1.6 lakh currently.
  • Indian consumers are already paying international merchants using UPI; but this was done on a case-by-case representation to RBI by cross-border entities based on the nature of transactions and demonstration of proper KYC/AML processes.

Impact:

  • The new regulations give a lot more clarity on allowed industry categories and enhanced transaction limits will enable to offer a wider choice to Indian consumers.
  • With this new PA/PG – CB licensing framework, there is no ambiguity and the licensed PA/PG – CB entities will be fully responsible for being compliant with PMLA including reporting suspicious transactions. So far fin techs were having shared responsibility with banks.
  • India inward remittances is a more than USD100 billion market with outward remittances being around one-fifth of it. Cost of remittance is certainly going to come down from current SWIFT model and the exorbitant FX conversion charges by banks.

1d. State of Economy – RBI

(As per RBI bulletin released on 16th Nov 2023).

India

  1. GDP growth is expected to be higher than 6.5% in Q3:2023-24, boosted by structural reforms, investments and ebullient domestic consumption.
  2. In urban areas, consumer appliances are in strong demand especially in mid and premium segments. About four-fifths of consumer durables purchases are backed by EMI offers.
  3. Optimistic outlook validated by widespread growth in profits in second quarter. Balance sheets of banks and corporates are healthiest in long time supporting the credit needs of the resurgent economy.
  4. Investment demand appears to be resilient with Govt infra spending, uptick in private capex, automation, digitalisation and indigenisation.
  5. Rising food prices pose the sole threat while RBI was preparing for an anticipated uptick in inflation readings for November and December

Global

  1. The global economy is showing signs of slowing down in the final quarter of 2023 though global recession has not come true. But continues to face multiple macroeconomic and geopolitical shocks, amid tightening financial conditions and elevated inflation.
  2. Global supply chain pressures index (GSCPI) moderated to -1.7 in Oct 2023.
  3. Europe appears to be on the edge of recession while China is stalling.
  4. The US has emerged as a key driver of global growth although its outlook is more uncertain now than before as it swings from hard landing to soft landing to no landing.

2. UPI Credit

NPCI on Nov 16, 2023, announced the transaction limit for RuPay Credit Cards on UPI as the lowest of the following:

  • RuPay Credit Card limit set by the issuer
  • The limit put in place by the issuer for ‘RuPay Credit Card on UPI’ transactions as per their risk management framework.
  • Limit set by the customer, as per RBI circular on Enhancing Security of Card Transactions dated January 15, 2020.

Subject to ceiling of ₹ 1 lakh per day and ₹ 2 lakh for some special MCC codes

This is likely to enhance customer satisfaction and enable users to make high-value e-commerce, travel and hotel reservations, health care service, and educational institution bookings.

  • NPCI has also asked payment apps such as Google Pay, Paytm, PhonePe etc. and banks to deactivate the UPI IDs and numbers that have not been active for more than one year to prevent the inadvertent transfer of money to unintended recipients in case customers change their mobile number without disassociating their old number from the banking system.

3. SEBI

SEBI on Friday decided to do away with the provision of requiring the freezing of folios without PAN, KYC details and nomination for all holders of physical securities. The move, aimed at simplifying the rule, will come into force with immediate effect, the SEBI in its circular on Friday.

What has changed?

  • As per SEBI Circular issued in May 2023, it was mandatory for all holders of physical securities in listed companies to furnish PAN, nomination, contact details, bank account details and specimen signature for their corresponding folio numbers.
  • The folios wherein any one of such documents are not available on or after October 1, 2023, was required to be frozen by the Registrars to an Issue and Share Transfer Agents (RTA). As per the new circular the term “freezing/frozen” has now been removed.
  • Further, frozen folios were required to be referred by the RTA or listed company to the administering authority under the Benami Transactions (Prohibitions) Act, 1988, and/or Prevention of Money Laundering Act, 2002, if they continue to remain frozen as on December 31, 2025.

4. Goldman Sachs – 2024 Macro Outlook*

  1. Despite favourable economic conditions, only a limited risk of recession is seen, pegging the US recession probability at 15%. Several factors could support global growth, such as strong household income growth, easing monetary and fiscal policies, and a recovery in manufacturing activity.
  2. Major Developed Market (DM) central banks are expected to halt rate hikes, with potential rate cuts not anticipated until the second half of 2024. Central banks are likely to maintain policy rates above their current long-run sustainable levels.
  3. Predicted growth rate for 2023 is at 6.4%, for India continuing to be the global highest.
  4. China’s growth, although disappointing in 2023, is expected to benefit from policy stimulus. However, a multi-year slowdown is likely to continue, with GDP growth forecasted to slow to 4.8% in 2024.
  5. Bonds, credit, and equities will deliver positive returns in the mid-single to low-double digits, a significant improvement over previous year. This outlook is framed within the context of supply constraints, steady demand growth, and geopolitical risks.

(*from redacted version of the original report released last week)

5.  S&P – Country outlook 2024

Five key takeaways from S&P report titled “Global banks country by country outlook 2024 released on Thursday.

  • India’s economic growth prospects should remain strong over the medium term, with GDP expanding 6-7.1 per cent annually in fiscal years 2024-2026,
  • the banking sector’s weak loans will decline to 3-3.5 per cent of gross advances by March 31, 2025, on the back of structural improvement, including healthy corporate balance sheets, tighter underwriting standards and improved risk management practices.
  • Interest rates in India are unlikely to rise materially, and this should limit the risk for the banking industry.
  • Unsecured personal loans have grown rapidly and could contribute to incremental NPLs; underwriting standards for retail loans generally remain healthy and overall level of delinquencies remains within acceptable limits for this product category.
  • global uncertainties will have a lesser impact on the Indian economy.

6. Corporate Q2’FY24 performance

  • Net profit growth surged to an eight-quarter high of 41.4% for a sample of 3,573 companies in the second quarter of the current fiscal year from a year earlier: riding a stellar show by automobiles, banking and finance, cement and metal companies with a domestic focus.
  • Revenue grew a modest 6.2% posting second Qr of low growth as consumer goods companies faced volume pressure and IT companies continued to struggle for growth. This is second consecutive quarter of low growth after double digit expansion in the preceding 9 quarters.
  • Lower commodity prices and fuel prices, and cost-cutting initiatives helped expand profit despite the muted revenue growth.
  • Excluding banks and finance companies, September quarter revenue growth dropped sharply to 1.9% while net profit increases eased to 40.1%. For this sample, operating margin improved to 16.3% from 12.2% a year ago while net margin expanded by 210 basis points to 7.5% (100 basis points equal one percentage point).
  • The total sample’s operating margin improved by 360 basis points year-on-year to 18.5%.

 The future trend will depend upon factors such as the extent of inflationary pressure, interest-rate scenario, global geopolitical developments and the trend in government expenditure ahead of general elections in 2024.                                                                                                                           

(source : ET)

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